The arrival of Bitcoin in 2009 introduced the world to a brand new form of finance and an entire universe of new possibilities through its blockchain framework. While cryptocurrencies and other blockchain-based financing built themselves a reputation for being largely speculative and extremely volatile, some of the applications arriving through the use of blockchain have been far safer for investors. The arrival of asset-backed security tokens has been heralded as an opportunity for investors to buy into blockchain-backed technology in a far safer and sustainable fashion.

Many of the biggest institutions across the world of finance and tech, like JP Morgan, Square, and Facebook have already made moves in the blockchain ecosystem. In the future, it’s inevitable that we’ll see even more arrivals as blockchain begins to integrate heavily with payment systems — particularly in the form of asset tokenization, which can be seen in the development of security token offerings.

But what exactly is a security token offering? And how does it stand out from the wider world of cryptocurrencies? Let’s delve deeper into the rich and varied world of asset-backed securities:

Defining an STO

Security token offerings are early purchasing opportunities for investors to buy into specific security tokens. Although security tokens can vary depending on their provider, they typically represent an investment contract into an underlying investment asset — like stocks, bonds, and real estate.

In the world of investing, a security is defined as a “fungible, negotiable financial instrument that holds some type of monetary value.” This means that security tokens are pegged to tangible, real-world assets. In the case of ReTok, the real-world asset that our security tokens represent is real estate, through a portfolio of properties carefully identified by our investment committee of experts as having the greatest growth potential — meaning that the value of your asset is directly linked to the real estate market.

With this in mind, a security token represents the ownership of the investment product, which is securely recorded on a blockchain. Much like buying traditional stocks when ownership information is written on a document and issued as a digital certificate like a PDF, STOs record immutable information on a blockchain and issue it as a token.

What’s the Difference Between an STO and an ICO?

Here, it’s important to note that most ICOs are created as a means of raising funds in a largely unregulated environment. Many ICOs look to position their offerings as utility tokens to avoid regulatory scrutiny.

With this in mind, most founders and projects argue that they distribute user tokens to access their distributed applications (DApps) or their own native platforms. The reason for this move is that their coin is designed to be more of a utility — rather than an asset built on speculation. This logic can enable initial coin offerings to bypass regulators and the necessity of registering their security with the SEC in the process.

On the face of things, ICOs and STOs follow a similar process. Buyers receive their digital coins or tokens representing their investment after buying into the project. However, unlike an ICO coin or token, the funds raised through a STO are not generally available to the issuer. Instead, they are affected to a specific purpose.

In a nutshell:

An ICO aims to fund the expenses of a company, like salaries, giving the holder of the tokens no rights to the profits generated by the project. Buyers of these type of tokens are consumers.
A STO is the sale of a number of claims to an asset. The company offering the tokens have to fund their expenses another way. Buyers of these type of tokens are investors.

For instance, ReTok’s security tokens give investors the rights to the cashflows generated by the underlying portfolio of properties. The rights to the cashflow is the claim, the portfolio is the asset.

The difference is important, as it means that investors in a STO is exposed to the risks of the underlying asset, while the participants in an ICO is exposed to the risks of the project.

If the project behind an ICO fails, the token holders end up with nothing.
If the company behind a STO fails, the token holders still have the contractual claim to the underlying assets.

Participating in a Security Token Offering

To participate in STOs like that offered up by ReTok, investors will need to go through KYC / AML verification process to satisfy regulatory demands.

Purchasing security tokens can vary depending on the platform the issuer is using. ReTok allows investors to participate in the purchase of their STO with as little as €100. Cryptocurrencies can commonly be used to participate in various security token offerings. The funds are simply collected and affected to a purpose — and verified through a smart contract.

With security tokens like ReTok, the tokens investors can buy can easily be traded on regulated markets — making it easy for investors to exchange their holdings as and when they want.

Fundamentally, security token offerings provide investors with an unprecedented opportunity to tap into the sprawling world of cryptocurrency and secure blockchain technology whilst safe in the knowledge that their securities are attached to real-world assets — adding an all-important tangible anchor to their investments.

What is a Security Token Offering?